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The shake-up last week at St. Joe, which gave control of the big, controversial Florida landowner to investor Bruce Berkowitz of Fairholme Funds, does nothing to solve the company's basic problems: a weak real-estate market in the Florida Panhandle—known to boosters as the Emerald Coast, to the less charitable as the Redneck Riviera.

St. Joejoe 2.09020902090209%St. Joe Co.U.S.: NYSEUSD18.56
0.382.09020902090209%
/Date(1427835914820-0500)/
Volume (Delayed 15m)
:
414707AFTER HOURSUSD18.566
0.006000000000000230.032327586206896554%
Volume (Delayed 15m)
:
1954
P/E Ratio
4.209380386464665Market Cap
1678068593.68988
Dividend Yield
N/ARev. per Employee
11506100More quote details and news »joeinYour ValueYour ChangeShort position
shares (ticker: JOE), at 27, could go much lower if Berkowitz is unable to realize significant value from the company's vast holdings of 574,000 acres, or almost 900 square miles. The land is mostly in the Panhandle, and much of it is forest, with just 41,000 acres "entitled" for development. It could take decades to develop it all, given the pace of sales. Last year, St. Joe sold just 3,000 acres.

On the Beach: WaterColor, a St. Joe development on the Gulf of Mexico between Pensacola and Panama City. The company is operating at a loss.
The St. Joe Co./via Bloomberg News

The Panhandle is a depressed region in a depressed state, where home prices in prime markets like Miami, Fort Myers and Tampa are down 40% from peak levels. Florida has also been losing population, as retirees opt for Georgia and the Carolinas. Panama City, near much of St. Joe's holdings, isn't one of the state's most attractive cities, and it has reinforced its downscale image by courting the college "spring break" crowd this year.

In its third-quarter 10-Q report, St. Joe noted that "inventories of resale homes and homesites remain high in our markets, and prices remain depressed…We do not expect any significant favorable changes…in the near term."

AFTER SEVERAL WEEKS OF SPARRING with management, Berkowitz, whose firm owns 29% of St. Joe, last week gained control of the board and forced out the company's CEO, Britt Greene. And late Friday, Berkowitz was named St. Joe's chairman, and the company's poison pill—designed to deter a takeover—was eliminated, resulting in a 5% gain in the stock. A purchase of St. Joe seems unlikely.

The company is looking for a new CEO while it considers "financial and strategic alternatives" in conjunction with its advisor, Morgan Stanley. The strategy has been to develop and sell its most desirable land near the Gulf of Mexico for residential and commercial use, while selling rural land and harvesting timber.

The most prominent bear is David Einhorn of New York investment firm Greenlight Capital. Einhorn has argued St. Joe could be worth $10 a share or less. Last fall, he said many of St. Joe's residential developments amounted to "ghost towns," and he made a negative case in a 138-page presentation, "Field of Schemes: If You Build It, They Won't Come," available on Greenlight's Website.

Einhorn said much of St. Joe's best land on the Gulf of Mexico already has been sold, and it doesn't make economic sense for the company to turn raw land into residential lots. He pegged fair value at around $1,500 per acre, roughly the price of southern timberland. St. Joe now is valued at $4,000 per acre, based on its market value of $2.4 billion. Einhorn, who declined to comment, doubts any buyer would pay anything close to the current share price.

A bearish analyst, Monness Crespi Hardt's Jeremy Pinchot, wrote last week that St. Joe's problem is that its "land assets are not that spectacular. Fairholme's problem is that it owns roughly 30% of the company, whose assets are worth between $14 and $18 a share, and there seems to be very little buyer interest in their properties."

St. Joe / JOE

Recent Price

$26

2009 EPS

-$1.42

2010 EPS

-$0.39

2010 Revenue

$100 mil

Shares Outstanding

91.8 mil

Stock-Market Value

$2.4 bil

Book Value/ Share

$9.50

Land Owned

574,000 acres

Implied Val per Acre*

$4,000

Largest Holder

Fairholme ( 29%)

*based on current market value Sources: Thomson Reuters; company reports

The financials are uninspiring. Revenue from land sales is down sharply in recent years, and St. Joe operates at a modest loss, as real estate and timber sales have been offset by asset write-downs and the operating expenses. With annual overhead at nearly $50 million, it posted a loss of $36 million, or 39 cents a share, on sales of $100 million in 2010; in 2009, it lost $1.42 a share on revenue of $138 million.

The stock trades at a sizable premium to book value of $9.50 per share. St. Joe has scaled back its development efforts, spending only $16 million on capital outlays in 2010.

The bull case is that St. Joe, founded in 1936, owns an enormous amount of land acquired decades ago at minimal cost, and that ultimately the value will be realized from residential development as well as commercial projects and rural land sales. St. Joe boasts that 70% of its land lies within 15 miles of the Gulf of Mexico.

The company also has a strong balance sheet, with cash of $184 million and debt of just $55 million, giving it considerable staying power. Book value, fans say, is irrelevant due to the super-low cost basis of its land. The stock could also get a lift if bears, who've shorted more than 25% of outstanding shares, are forced to cover. St. Joe has some successful developments, like WaterColor, but that's a rarity, and WaterColor is already mostly sold.

The Bottom Line

Despite a recent change in control, St. Joe has fundamental problems—including the Florida economy—that are likely to curtail growth. Some see shares dropping to $10.

St. Joe has sought to jump-start development by donating 4,000 acres for a new airport, replacing one 35 miles away in Panama City. The airport was completed last year. "I want it to be a metropolis. I'm not just talking about a vacation community," Berkowitz said last month in an interview. "When industry comes, which it will…because the area is in an aerospace corridor, it's going to be one of the best places to live and work in Florida."

The company says it was hurt by the Gulf oil spill last year and is seeking unspecified damages. St. Joe could bring in partners to speed residential and commercial development, but the company presumably has considered that in the past and appears to have had little success. Berkowitz couldn't be reached for comment, and St. Joe isn't giving media interviews now.

While investors often get excited by land-rich companies, St. Joe's land doesn't look very attractive, and frustrated shareholders could be sitting on it for a long time.